Cracking the rural consumption puzzle

The surge in non-farm employment has led to a rural consumption splurge, making listed companies bullish

Is rural India languishing in abject misery, or is it on a cheerful spending spree? Today you can get diametrically opposing views on this, depending on where you get your information. If you are an avid follower of news, then you would be firmly in the pessimist camp, having read all about plummeting crop prices, wasted produce and farmers’ long marches.

But if you’re a stock market investor, you’re probably busy hunting for Bharat-themed stocks after listening to companies and analysts waxing eloquent about the rural consumption revival.

Rural spending spree

As listed companies recently unveiled their FY18 results, a recurring theme in their investor interactions was the buoyancy in rural offtake of consumer products. Bharat-focussed firms appear convinced that rural India is staging a convincing come-back from the drought-induced slump of FY15 and FY16.

India’s largest tractor manufacturer, M&M just closed FY18 with a 22 per cent growth in its farm equipment division, while rival Escorts clocked a 25 per cent growth. After budgeting for an 8-9 per cent growth earlier this year, tractor manufacturers have been pleasantly surprised by the strong upsurge in rural demand in recent quarters, which has lifted the industry’s sales growth to 14-15 per cent. This is the second consecutive year of bumper sales after FY17, when they grew by 18 per cent, after shrinking in FY15 and FY16.

Hero Motocorp wrapped up FY18 on a high note, recording its highest ever annual sales of 75 lakh two-wheelers, a 14-per-cent growth over last year. In the investor call, the company spoke of the uplift in rural consumption that had driven a 30-per-cent plus growth in its entry-level motorbikes. Rural motorcycle sales had grown 2 to 3 percentage points higher than national growth.

FMCG majors with a big rural footprint — Hindustan Unilever and Dabur India — have called attention to accelerating rural offtake of their products since the December quarter. Crisil has just predicted that rural FMCG sales will grow at 14-16 per cent in FY19, far outpacing urban growth of 8 per cent. This is a sharp pick up from 5 per cent growth in FY16 and FY17 and 10 per cent in FY18.

Cement makers, home finance NBFCs and makers of light commercial vehicles who cater mainly to the rural hinterland, have also chimed in with positive rural commentary.

But if listed companies are so gung-ho about rural spending, what about all the hard evidence that points to an agrarian crisis — deflating food WPI, crop prices dipping below MSPs (minimum support prices) and States announcing loan waivers? The answer seems to be that agriculture no longer plays a make-or-break role in deciding rural fortunes.

Rural isn’t farms

Most of us think that India’s rural fortunes are inextricably linked to a bountiful monsoon and booming agricultural output. But blame that notion on outdated school textbooks.

Over the last four decades, even as the contribution of agriculture to India’s GDP has shrunk from nearly 50 per cent to about 15 per cent, rural folk have been actively diversifying out of agriculture, to supplement their income.

A November 2017 paper from the NITI Aayog (Chand, Srivastava and Singh) noted that agriculture’s contribution to rural India’s GDP steadily nosedived from over 72 per cent in FY71 to 39 per cent in FY12. In effect, non-farm activities such as manufacturing, construction and services already accounted for 61 per cent of rural incomes six years ago. The proportion is likely to have grown since.

The workforce in rural areas has shifted less dramatically, but it has moved nevertheless. Between FY05 and FY12, the number of rural folk employed in agriculture fell from 249 million to 216 million, while those employed in factories, construction or services rose from 94 to 121 million. What’s more, those employed in these non-farm activities managed to earn twice or even thrice as much as cultivators or farm labourers earned. In the last five years, even as two drought years have levelled India’s agricultural GDP growth to 3 per cent a year, manufacturing and services GDP continued to grow at 7.7 per cent. So, once you know that agriculture is no longer the primary employer in rural areas, it becomes easier to understand why rural consumption is no longer joined at the hip with monsoon rains or crop prices.

Infrastructure build-out

Deflating prices of food crops and the inefficacy of the MSP mechanism in shoring up farm incomes seem to be key causes of the current agrarian distress. But if the Centre has been stingy with its MSP-related give-aways in recent years, it has been quite generous with splurging on the rural infrastructure build-out.

Take the Pradhan Mantri Gram Sadak Yojana, a scheme aimed at connecting all villages with more than 500 residents through paved roads. After snail-paced progress until FY10, the scheme has picked up pace in recent years. By end-2018, the scheme had taken up 1.7 lakh road projects and laid an impressive 5.5-lakh-km of rural roads, with nearly 2-lakh-km executed in the last four years alone.

Progress on the PM Awaas Yojana, aimed at providing affordable homes to the rural poor has been equally brisk, with the number of rural homes constructed vaulting from 2.3 lakh in FY13 to 43.6 lakh in FY18. In its widely followed ‘Rural Safari’ report, JM Financial notes that Central budget outlay on 14 different rural schemes including MNREGA, jumped from ₹1.36 lakh-crore to over ₹2 lakh-crore in the last three years, with State governments also upping their capex.

This infrastructure spending binge is likely to have created more non-farm rural jobs and supplemented incomes too, cushioning rural India from the recent shrinkage in agri-income.

Credit binge

In India, both the Centre and the RBI have always pushed banks to ratchet up agricultural credit, under mandated priority sector lending norms. With industrial lending turning a minefield in the last four years, banks are only too glad to turn their attention elsewhere.

Between March 2014 and March 2018, bank credit to agriculture and allied activities has expanded 56 per cent from ₹6.6 lakh-crore to ₹10.3 lakh-crore. NBFCs and small-finance banks have also made high-yielding rural borrowers their main target segment.

All this has resulted in easier availability of credit to the more affluent segment of rural consumers wishing to splurge on farm equipment, personal transport or white goods. Financed purchases, for instance, are estimated to account for about 45 per cent of India’s tractor sales.

The rash of farm loan waivers by State governments, totalling to over ₹80,000 crore are also likely to have bolstered rural sentiment this year. Then, there’s also the fact that there’s always excess cash sloshing around in the hinterland during election years and we’ve had a string of State elections lately.

All this gives us an answer to the initial question: Yes Indian agriculture is in distress, but that doesn’t mean Bharat is in dire straits.